Financial regulation in 2017: Europe and the US

Financial Regulatory Alert

The result of the UK referendum on its EU membership and the outcome of the US Presidential
elections of 2016 have laid the ground for 2017 to be a year of transition for both Europe and
the United States. As transitions are often associated with uncertainty, this article aims to
provide some insight into the legal and regulatory developments expected to take place during
the course of 2017.

European Union and United Kingdom

The UK referendum set in motion a number of actions and
preparation regarding the exit of the UK from the EU. However,
all EU regulations will continue to apply to UK financial
institutions until the UK formally leaves the EU at the end of the
exit negotiations. This is likely to be at least two years after
March 2017, when Article 50 of the Treaty on European Union
is expected to be triggered. Meanwhile, the political environment
throughout the EU is rather sensitive, with both the French and
the German upcoming elections generating further sources of
uncertainty and concern. With that in mind, the main EU
regulatory areas to be affected during 2017 are outlined below:

Financial crime: Financial crime is a high priority for both
the EU and the UK. EU member states are required to
transpose the Fourth Money Laundering Directive into
national law by 26 June 2017, while the European Parliament
and the Council of the EU are already considering going
beyond this with the Fifth Money Laundering Directive

FinTech: The General Data Protection Regulation
("GDPR") will have a direct effect in all EU member states
from 25 March 2018. Financial institutions will consequently
need to prepare in the course of 2017. GDPR may have an
impact on FinTech, which remains high on the priority list
for both the EU and the UK, and may also affect the transfer
of data between EU and third countries

Individual accountability: The UK Senior Managers
Regime and the Certification Regime will be extended to all
authorised firms, with the FCA consulting on the precise
arrangements. "Material risk-takers" will need to be assessed
by firms by March 2017, while the scope of application for
Conduct Rules will be extended from March 2017

Investment funds: The EU Parliament and the Council are
expected to formally adopt the proposed Regulation on
Money Market Funds ("MMF Regulation") in 2017. The
MMF Regulation will affect the requirements relating to the
liquidity and stability of money market funds

Payment services: Member states must transpose the
Payment Services Directive 2 ("PSD2") into their national
laws and regulations by 13 January 2018. PSD2 will have a
wider scope of application compared to the initial directive

Prudential regulation: During 2017, the Parliament and
the Council of the EU will continue the amendment process
for the Capital Requirements Regulation and the Capital
Requirements Directive IV. Basel III measures will be
introduced into EU law to improve lending for small and
medium-sized enterprises. Meanwhile, the Basel Committee
on Banking Supervision also intends to amend the Basel III
framework, leading to Basel IV

Securities markets: Financial institutions affected by MiFID
11 will spend most of 2017 preparing for the implementation
of the new regime on 3 January 2018. Financial institutions
will also have to deal with EMIR and any related
developments to come during this year

Retail securities markets: The application date of the
Regulation on key information documents ("KIDs") for
packaged retail and insurance-based investment products
("PRIIPs") has been delayed by a year in order to enable
the RTS on KID to be revised by the Commission. Issuers
and distributors of PRIIPs will have to be compliant by
I January 2018

Capital markets union: Despite the fact that the UK -
one of the strongest advocates in favour of a capital markets
union - voted to the leave the EU, it seems that the
Commission intends to move forward with that initiative,
even without the UK. Key developments will include political
agreement on the proposed Securitisation Regulation and on
the amendments to the European Venture Capital Funds
Regulation, as well as on the European Social
Entrepreneurship Funds Regulation

United States

A number of issues are likely to be affected by the imminent
inauguration of President-elect Donald Trump on 20 January
2017 and the new administration, as well as Republican
majorities in both houses and the changing political atmosphere
in the US. The change of leadership is bound to lead to policy
changes and a possible reshaping of the regulatory status quo.

It is still too early to have a clear idea regarding the specific
intentions of the new President, but based on President-elect
Trump's comments while a candidate and those of his transition
team, it is likely that the new administration will seek to simplify
the rules relating to lending in an effort to move to a more
lending-friendly environment.

On that basis, the operation and organisational structure of the
Consumer Financial Protection Bureau, echoing a stricter
approach regarding regulation, may be affected. Other key
aspects of Dodd-Frank which industry has disfavoured have the
potential to be challenged or revised, including:

Composition and role of the Financial Stability Oversight
Council and one of its primary missions of designating
systemically important financial institutions for enhanced
capital and scrutiny requirements

Thresholds for Dodd-Frank's resolution planning
requirements

There is also attention on the impact of the Community
Reinvestment Act and whether its mandate for credit to lowand
moderate-income borrowers and communities had an
unintended consequence of weakening banking institutions
during the crisis. During President-elect Trump's term, the
following vacancies will result from term expirations:

March 2017 - Thomas Curry, Comptroller of the Currency
and FDIC Board Member

November 2017 - Martin Gruenberg, FDIC Chairman

February 2018 - Janet Yellen, Federal Reserve Chair

July 2018 — Richard Cordray, CFPB Director

And still other resignations are often associated with changes in
administration.

Moreover, the upcoming departure of Chair Mary Jo White from
the Securities and Exchange Commission ("SEC") is likely to
have some effect on the Commission's overall direction. Initially,
only two Commissioners of opposite parties will remain to deal
with the immediate post-election period. Consequently, there
may be a pause in new initiatives as well as some uncertainty
regarding the SEC's approach to pending investigations,
particularly those where the SEC's enforcement staff is seeking
to expand existing legal theories of liability.

The appointment of Jay Clayton, a well-regarded M&A and
capital markets lawyer, as the new SEC Chair may bring some
changes on the enforcement side, but the enforcement approach
to mainstream insider trading, fraud and bribery cases is unlikely
to be affected. Regardless of who sits in the Oval Office or who
chairs the SEC, the fundamental goal of preserving the integrity
of US capital markets will likely remain unchanged and the SEC
will likely continue to pursue fraudulent activity. As a result the
SEC Enforcement Division's focus on potentially culpable
individuals will continue and corporations will still be held
responsible for violations although proposed penalty amounts
may receive more scrutiny as the make-up of the SEC changes
with the new administration. In addition, a newly constituted
Commission may shift enforcement resources away from
"broken windows" technical violations.

On the regulatory side, given his background, the new Chair
(assuming he is confirmed by the Senate) of the Commission
could lead the Commission to focus on streamlining regulation
and easing the process of raising capital. If this is the case, market
participants should expect a newly constituted Commission to
look for ways to cut "red tape" regulations that make it harder to
raise capital while not adding to the accuracy of financial
statements. Another possibility is that the new Commission may
also look to expand capital raising options and ease perceived
unnecessary regulatory burdens on the financial services industry.

There is also speculation that Congress may decide to revisit the
size and breadth of powers of the SEC itself, but nothing is
certain. Implementation of the Department of Labor Fiduciary
Rule, however, maybe delayed, if not repealed, considering that
Republicans now control both Houses of Congress.

The CFTC gained significant powers as a result of the passage of
Dodd-Frank. While Republican representatives have stated that
they intend to scale back that legislation, there is no clear
indication that they will target the agency.

Despite the potential mid or long-term change of strategy, the
day-to-day regulation and operation of the regulatory bodies is
likely to remain largely untouched by the change of leadership, at
least in the near future. Moreover, many financial regulations are
written and enforced by non-governmental self-regulatory
entities such as the Financial Industry Regulatory Authority
("FINRA") and the National Futures Association, which are
much less likely to be directly impacted by a change in
administration. According to FINRA's examination priorities for
2017, there is no indication that any major regulatory changes are
expected. FINRA's priorities for 2017 include protection of
senior investors, suitability of products, credit risk, trading
patterns, electronic communications and money laundering.

Support for the FinTech sector is likely to remain unaffected,
considering that its growth potential is undisputed by both
Democrats and Republicans. The focus on cyber risk, data,
quality, analytics and reporting, as well as the focus on prudential
standards, risk modelling and management are also likely to
remain.

How we can assist you

DLA Piper, both in Europe and the United States, has dedicated
teams of well-experienced and well-informed lawyer, specifically
in these areas, able to navigate you through the new
developments. We can advise and assist you on the above legal
and regulatory issues that could affect your business activities
and/or the arrangements you currently have in place. Please get
in touch with one of the authors, or your usual DLA
Piper contact.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.